Portugal has become one of the most popular destinations for retirees and expats, thanks to its stunning landscapes, warm climate, rich culture, and affordable cost of living. But before you pack your bags, it’s essential to understand how your income will be taxed once you become a resident of Portugal.
The recent end of the Non-Habitual Resident (NHR) regime in January 2024 has brought some important changes to how foreign income is treated, especially for U.S. citizens. Without NHR’s favorable tax breaks, planning for your tax obligations in Portugal is now more critical than ever.
In this post, we’ll break down how Portugal taxes:
- Social Security benefits – Will you still pay U.S. taxes, or just Portuguese taxes?
- RMDs (Required Minimum Distributions) – What happens when you start withdrawing from your retirement accounts?
- Capital gains – How will Portugal tax your investment income and real estate profits?
If you’re considering making Portugal your new home, understanding these key tax rules will help you avoid surprises and plan for a smooth financial transition.
How Social Security Is Taxed in Portugal
If you’re planning to move to Portugal and have U.S. Social Security for retirement income, understanding how it will be taxed is essential. While Portugal offers a wonderful quality of life, its tax rules are notably different from those in the U.S., particularly after the end of the Non-Habitual Resident (NHR) regime in January 2024.
U.S.–Portugal Tax Treaty
The U.S.–Portugal Tax Treaty plays a key role in avoiding double taxation of Social Security benefits. Under this treaty:
- Social Security benefits are taxed only in Portugal for Portuguese tax residents.
- This means you do not owe U.S. federal taxes on your Social Security income once you become a tax resident of Portugal.
In Portugal, U.S. Social Security benefits are classified as foreign pension income and taxed under the country’s progressive income tax rates:2024
|
Annual Income (€) |
Tax Rate (%) |
|
Up to €7,703 |
13.25% |
|
€7,703 – €11,623 |
18% |
|
€11,623 – €16,472 |
23% |
|
€16,472 – €21,321 |
26% |
|
€21,321 – €27,146 |
32.75% |
|
€27,146 – €39,791 |
37% |
|
€39,791 – €51,997 |
43.5% |
|
€51,997 – €81,199 |
45% |
|
Over €81,199 |
48% |
This means that if your total annual income, including Social Security benefits, exceeds €81,199 (about $86,000), you could face a 48% tax rate on the highest portion of your income. Compared to the U.S., where up to 85% of Social Security benefits is taxable (depending on your income), Portugal’s progressive rates will likely result in a higher tax burden—especially for those with significant additional income.
For a detailed breakdown of Portuguese income tax rates and rules, see https://taxsummaries.pwc.com/portugal/individual/taxes-on-personal-income
How RMDs (Required Minimum Distributions) Are Taxed in Portugal
In Portugal, RMDs are treated as ordinary pension income and Taxed at Progressive Rates
- RMDs will be added to your total annual income and taxed at Portugal’s progressive income tax rates, which range from 13.25% to 48%significantly higher than the U.S. for some retirees. 2024:
|
Annual Income (€) |
Tax Rate (%) |
|
Up to €7,703 |
13.25% |
|
€7,703 – €11,623 |
18% |
|
€11,623 – €16,472 |
23% |
|
€16,472 – €21,321 |
26% |
|
€21,321 – €27,146 |
32.75% |
|
€27,146 – €39,791 |
37% |
|
€39,791 – €51,997 |
43.5% |
|
€51,997 – €81,199 |
45% |
|
Over €81,199 |
48% |
Double Taxation Relief:
-
- Under the U.S.–Portugal Tax Treaty, RMDs are taxed only in Portugal if you are a Portuguese tax resident.
- The U.S. does not withhold taxes on your RMDs in this case, but you must still file your annual U.S. tax return to report the income and claim treaty benefits.
How This Compares to U.S. Taxation
In the U.S., RMDs are taxed as ordinary income at federal rates ranging from 10% to 37%, depending on your income level. By contrast, Portugal’s progressive tax rates can climb as high as 48%, which may result in a higher overall tax liability—especially if your RMDs push you into the top brackets.
For a detailed breakdown of Portuguese income tax rates and rules, see https://taxsummaries.pwc.com/portugal/individual/taxes-on-personal-income
How Capital Gains Are Taxed in Portugal
If you plan to fund your retirement in Portugal through investment income or by selling assets like stocks, bonds, or real estate, understanding how capital gains are taxed is essential. Unlike the U.S., where long-term capital gains enjoy preferential tax treatment, Portugal taxes realized gains at standard rates with some unique rules for different asset types.
Capital Gains on Investments
For Portuguese tax residents, capital gains from stocks, bonds, and other investments are taxed at a flat rate of 28%. This applies to profits earned when you sell investments at a higher value than the purchase price.
Key Points to Know:
- Unlike in the U.S., where long-term gains (held over one year) are taxed at reduced rates (0%, 15%, or 20%), Portugal does not distinguish between short-term and long-term capital gains.
- Losses on investments can offset gains, reducing your taxable amount, but only within the same year. There’s no carryforward of losses to future tax years.
Capital Gains on Real Estate
If you sell property in Portugal, capital gains are taxed differently:
-
50% of the capital gain is taxable.
-
The taxable portion is then added to your total annual income and taxed at Portugal’s progressive tax rates (up to 48%).
Real Estate Reinvestment Exemption: If you reinvest the proceeds from the sale of your primary residence into another primary residence in Portugal or the EU/EEA within 36 months, the gain can be partially or fully exempt.
No Wealth Tax in Portugal
One advantage Portugal offers over countries like the Netherlands is that there is no annual wealth tax. The Netherlands imposes a tax based on a deemed return on assets, regardless of whether you sell them, whereas Portugal only taxes realized gains when assets are sold.
Comparison to U.S. Tax Treatment
- In the U.S., long-term capital gains are taxed at reduced rates (0%, 15%, or 20%) based on your income.
- Portugal applies a flat 28% tax for most gains on financial assets and higher progressive rates for real estate gains.
For a detailed breakdown click here: https://taxsummaries.pwc.com/portugal/individual/income-determination
Is Moving to Portugal Right for You?
Portugal’s beautiful landscapes, affordable cost of living, and high quality of life make it an attractive destination for retirees and expats. However, the end of the Non-Habitual Resident (NHR) regime means you’ll need to carefully plan your finances to avoid tax surprises.
Here’s a quick recap of what to expect when it comes to your U.S. income:
- Social Security:
- Taxed only in Portugal under the U.S.–Portugal Tax Treaty.
- Treated as pension income and taxed at Portugal’s progressive rates of up to 48%.
- RMDs (Required Minimum Distributions):
- Considered ordinary income and taxed at progressive rates, which can be significantly higher than U.S. federal tax rates.
- Proper planning before age 73 (or 75 under U.S. rules) can help minimize the tax burden.
- Capital Gains:
- Realized gains on Financial assets like stocks and bonds are taxed at a flat 28% rate.
- Real estate sales are taxed on 50% of the gain, at progressive income tax rates.
- No annual wealth tax, which makes Portugal appealing for those with substantial savings or investments.
Key Takeaways
While Portugal’s tax system may seem more complex post-NHR, with thoughtful planning, it can still be a great choice for U.S. retirees. Benefits like the absence of a wealth tax and the ability to manage capital gains strategically make it especially attractive for those who want to balance lifestyle and financial security.
What to Do Next
If you’re considering moving to Portugal, here are your next steps:
- Assess Your Financial Situation:
- Review your Social Security benefits, RMDs, and investments to understand your tax exposure.
- Consult with a Cross-Border Tax Expert:
- Navigating U.S.–Portugal taxes can be complicated. A qualified professional can help you optimize your income, minimize double taxation, and ensure compliance in both countries.
Moving to Portugal can be an exciting and rewarding adventure. With the right planning, you can enjoy everything this beautiful country has to offer while ensuring your finances remain on track.